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Binding Leviathan: Credible Commitment
in an Authoritarian Regime

Roderick M. Hills, Jr. † & Shitong Qiao ††

                            INTRODUCTION
    Suppose that you are the ambitious mayor of a mid-size
Chinese city striving to win a promotion to a more prestigious
position. You do not have a lot of time to make your mark. The
Chinese Communist Party (CCP) will likely move you to a new
and better post in three to four years—if it is going to promote
you at all. You therefore need to make a splash quickly in a
way that conforms to the CCP’s promotion criteria. Here comes
the challenge: how can you assure prospective beneficiaries of
your long-range plans that those plans will ever yield fruit? Af-
ter all, your successor would want to impress her superiors
with her own projects, not stand in the shadow of your
achievements. And, if you cannot give them such assurance,
how can you induce them to make the investments you need to
achieve your plans?
    This problem of credible commitment dogs every govern-
ment, whether democratic or authoritarian. Governments that

     † William T. Comfort III Professor of Law, New York University Law
School.
     †† Assistant Professor, The University of Hong Kong Faculty of Law;
Global Associate Professor of Law, New York University (Fall 2017); JSD
(Yale). Many thanks for comments on an early draft to the participants of the
conference on Decentralization and Development sponsored by New York Uni-
versity’s Classical Liberalism Institute and the University of Hong Kong Fac-
ulty of Law on March 13–15, 2017 in Hong Kong. Both authors gratefully
acknowledge research assistance provided by Junye Guo and Yawen Li. Rick
Hills and Shitong Qiao gratefully acknowledge the generous support from the
Filomen D’Agostino Research Fund at New York University School of Law and
the University of Hong Kong Strategic Research Theme on China Business
and Economics respectively. Copyright © 2018 by Roderick M. Hills and
Shitong Qiao.

                                   1591
1592                 MINNESOTA LAW REVIEW                             [102:1591

have sufficient power to begin a project can always change
their minds but, paradoxically, their power to change their
plans makes them less powerful. 1 Omnipotence can be crip-
pling. If lenders cannot be assured that a current mayor’s suc-
cessors will repay loans, then they may charge him or her ex-
tortionate interest rates. 2 If homebuyers suspect that a mayor’s
touted plans to improve the schools, police, environment, or any
other long-term project will be abandoned by her successor,
they will discount their bids on the city’s land, reducing the
capitalization of good government and discouraging the current
mayor from even attempting such long-term improvements in
the first place.3 The bankruptcies of Detroit and Puerto Rico
are testaments to the potentially short-term horizons of elected
politicians, even in constitutional democracies.
     Authoritarian bureaucracies, however, face special credible
commitment problems that may further exacerbate the ability
of local officials to pursue long-term goals. Fear that local offi-
cials will build up a local power base that could be used to rebel
against the center has historically induced the leadership of
China, Imperial and Communist alike, to transfer local officials

     1. For a general account of the problem of credible commitment and sov-
ereign debt, see CARMEN M. REINHART & KENNETH S. ROGOFF, THIS TIME IS
DIFFERENT: EIGHT CENTURIES OF FINANCIAL FOLLY (2009) (explaining how
large-scale buildups of debt pose risks because they make an economy vulner-
able to crises of confidence, particularly when debt is short-term and needs to
be constantly refinanced). For a general overview of the tension between dem-
ocratic accountability and credibility of governmental commitments, see PE-
TER H. SCHUCK, WHY GOVERNMENT FAILS SO OFTEN: AND HOW IT CAN DO
BETTER 182–90 (2014) (noting that the “demands of democratic legitimacy and
accountability require government to respond to changed conditions . . . in
ways that will impair its credibility”). For a theoretical examination of how
democratic elections can increase the problem of credible commitment, see
Steven A. Block & Paul M. Vaaler, The Price of Democracy: Sovereign Risk
Ratings, Bond Spreads and Political Business Cycles in Developing Countries,
23 J. INT’L MONEY & FIN. 917 (2004) (finding that agencies and bondholders
view elections negatively, increasing the cost of capital to developing democra-
cies). For one empirical test of the effects of political structures on ability to
make credible commitments to repay sovereign debt, see Michael Breen & Iain
McMenamin, Political Institutions, Credible Commitment, and Sovereign Debt
in Advanced Economies, 57 INT’L STUD. Q. 842 (2013) (arguing that power-
sharing and party system polarization have important effects on long-term in-
terest rates). The article then finds that, where collective responsibility is high
and polarization is low, markets perceive more credible commitments on the
part of sovereign debtors.
     2. See Breen & McMenamin, supra note 1, at 843.
     3. See PIERRE F. LANDRY, DECENTRALIZED AUTHORITARIANISM IN CHINA:
THE COMMUNIST PARTY’S CONTROL OF LOCAL ELITES IN THE POST-MAO ERA
263 (2008).
2018]                  BINDING LEVIATHAN                                1593

among subnational jurisdictions. 4 Such frequent transfers un-
dermine those officials’ capacity to make the credible commit-
ments that officials with stable tenure can make with ease.
Robert Moses, a mid-level bureaucrat in a constitutional de-
mocracy, was a mighty power broker because he stuck to one
city, New York, for his entire career. 5 Ironically, a mayor in
Communist China, albeit untrammeled by democratic elections
or local rivals with formal powers to dismiss him or her, lacks
the same tenure and, therefore, the same power. 6
     Moreover, authoritarian regimes discourage the develop-
ment of institutions that are independent from the central and
local governments and that might otherwise act as monitors
and enforcers of long-term commitments. 7 Consider, for in-
stance, the role of lenders as monitors of fiscal probity. By di-
viding powers over decisions such as debt repayment and the
bailout of defaulting governments among rival institutions, lib-
eral democracies are able to make credible commitments to
both hard budget constraints against the bailout of unlawfully
profligate governments and the repayment of lawfully incurred
debt.8 China’s state-controlled banks, by contrast, face constant
political pressure to bail out failing state-owned enterprises
and extend credit to dubious city projects, resulting in balloon-
ing municipal debt of dubious legality.9 Similarly, the power of
homeowners in liberal democracies to elect local officials gives
those officials a powerful weapon with which to entrench long-
term investments in education, land-use regulation, parks, or
other municipal improvements, a weapon their counterparts in
authoritarian regimes lack. 10

     4. See WILLIAM T. ROWE, CHINA’S LAST EMPIRE: THE GREAT QING 37–39
(2012).
     5. See ROBERT A. CARO, THE POWER BROKER: ROBERT MOSES AND THE
FALL OF NEW YORK (1974) (examining the creation and use of power in local
and state politics, through the story of Moses’s use of unelected positions to
radically reshape New York City).
     6. See id.
     7. Luo Dang Lun (罗党论) & She Guo Man (佘国满), Di Fang Guan Yuan
Bing Geng yu Di Fang Zhai Fa Xing (地方官员变更与地方债发行) [Change of
Local Officials and the Issuance of Local Debts], (经济研究) 6 ECON. RESEARCH
J. 131.
     8. See WILLIAM A. FISCHEL, THE HOMEVOTER HYPOTHESIS: HOW HOME
VALUES INFLUENCE LOCAL GOVERNMENT TAXATION, SCHOOL FINANCE, AND
LAND-USE POLICIES 39–72 (2005).
     9. See Breen & McMenamin, supra note 1, at 843–84.
    10. See FISCHEL, supra note 8, at 39–72 (2005).
1594               MINNESOTA LAW REVIEW                       [102:1591

     In Part I, we describe the special problems for credible
commitment posed by China’s cadre transfer policy and, more
generally, the CCP’s distrust of divided power. Then, in Part II,
we examine whether the country’s current housing and finan-
cial markets effectively discipline local politicians. Part III is
devoted to an evaluation of the existing solutions that national
authorities apply to local government debt, a typical symptom
of the short-term behavior exhibited by local politicians. Final-
ly, Part IV proposes three new institutional solutions for resolv-
ing the credible commitment problem of China’s authoritarian
regime. In the end, we conclude that there is no magical solu-
tion that can reassure stakeholders, such as lenders or home-
buyers, that an autocratic mayor will follow through on her
promises. All of our proposed solutions, however, trade on the
intuition that even modest institutional limits on power can
mitigate the problem of powerlessness that is ironically created
by authoritarian power.

       I. THE PROBLEM OF CREDIBLE COMMITMENT
     The problem of credible commitment is usefully illustrated
by the tales of two Chinese mayors, both of whom racked up
immense amounts of municipal debt through socially dubious
demolitions. As will become clear below, far from being particu-
larly pernicious, these mayors were actually admirable in
terms of their activism and ambition. However, they were crip-
pled by poor incentives and bad institutions. Because they
lacked mechanisms by which to entrench long-term governance
reforms, they rationally cast their lot with debt accumulation
and large-scale demolition rather than making slower, less-
visible improvements in local governance.

A. A TALE OF TWO MAYORS
     Geng Yanbo was the mayor of Datong, a prefecture-level
city in Shanxi province, from January 2008 to February 2013. 11
After becoming mayor of Datong, Geng demolished all contem-
porary buildings in the old city for the purpose of restoring its
historical features, an urban development plan requiring the
relocation of over 40,000 households to a new city to be con-

   11. Geng Yan Bo Shi Zhang Da Tong 5 Nian: Huan Jing Pai Ming Cuan
Sheng 81 Wei GDP Xia Die 3 Wei (耿彦波市长大同5年:环境排名蹿升81位 GDP
下跌3位) [Mayor Yanbo Geng’s Five Years in Datong City: Environmental
Ranking Jumped 81 Places While GDP Fell 3 Places], IFENG (凤凰网) (Feb. 28,
2013), http://news.ifeng.com/mainland/detail_2013_02/28/22563990_0.shtml.
2018]                  BINDING LEVIATHAN                              1595

structed across the river 12 and an investment totaling RMB 50
billion. 13 During Geng’s five-year term, the city’s land-sale rev-
enue totaled about RMB 25 billion.14 The mayor also received
loans from two banks, the China Development Bank and Rural
Development Bank, both of which were policy-based banks of-
fering RMB 14 billion in loans at relatively low interest rates
for long terms. 15 By 2012, Datong’s total debt stood at roughly
RMB 20 billion, one billion more than its total revenue of RMB
19 billion in that year.16 Although Geng’s energy and charisma
might have led to a successful project, Geng did not stick
around. He was promoted to mayor of Taiyuan, the capital city
of Shanxi province, in February 2013. 17 Suddenly, the clock
stopped on Geng’s project: the new mayor of Datong was reluc-
tant to continue Geng’s plans. 18 As a result, construction com-
panies received no further payments from the government, and
numerous projects were suspended. 19
     Although he is now in prison after being convicted of cor-
ruption, Qiu He is another legendary Chinese city leader who
built a reputation on mammoth construction projects that did
not outlast his tenure as mayor. 20 As party secretary of Kun-
ming, the capital city of Yunnan province, from December 2007

   12. Shu Taifeng (舒泰峰), Da Tong Zao Cheng zhi Shang: Ri Tou 5500
Wan, Li Kai 1 Yue Zhao Bu Dao Hui Jia Lu (大同造城之殇:日投5500万 离家1
月找不到回家路) [The Ache of Datong’s Urban Construction: Daily Investment
Costs 55 Million Unable To Find Home After a Month’s Leave], SOHU (搜狐网)
(Sept. 24, 2013), http://business.sohu.com/20130924/n387104682.shtml.
   13. Geng Yan Bo: Gui Liu Shi Zhang Bei Hou de Min Yi An Liu (耿彦波:
跪留市长背后的民意暗流) [Yanbo Geng: The Public Opinion Undercurrent Be-
hind the Scene of People’s Knelling for the Stay of Their Mayor], SOHU (搜狐网)
(Feb. 21, 2017), http://news.sohu.com/s2013/newsmaker157.
   14. Id.
   15. Id.
   16. Id.
   17. Geng Yan Bo Shi Zhang Da Tong 5 Nian, supra note 11.
   18. Wu Gang (武刚), Da Tong Bai Yi Zao Cheng Lan Wei: Cai Zheng Chi
Jin Wai Di Da Gong Si Che Li (大同百亿造城烂尾:财政吃紧 外地大公司撤离)
[Ten-Billion City-Making Project Going Nowhere: Fiscal Austerity and Big
Companies Evacuating], ORIENTAL OUTLOOK WEEKLY (瞭望东方周刊) (Dec. 16,
2013), http://news.ifeng.com/shendu/lwdfzk/detail_2013_12/16/32160228_
0.shtml.
   19. Id.
   20. Yun Nan Yuan Sheng Wei Shu Ji Qiu He Shou Hui 2000 Duo Wan
Huo Xing 14 Nian 6 Ge Yue (云南原省委副书记仇和受贿2000多万 获刑14年6个
月) [The Previous Deputy Secretary of CPC Yunnan Provincial Committee He
Qiu Was Found Bribe-taking for Over 20 Million and Was Sentenced for 14
Years and 6 Months’ Imprisonment], CHINANEWS (中国新闻网) (Dec. 15, 2016),
http://www.chinanews.com/gn/2016/12-15/8095143.shtml.
1596              MINNESOTA LAW REVIEW                      [102:1591

to November 2011, Qiu launched plans for a nine-line subway
system that would require a RMB 300 billion investment. 21 The
massive size of this investment was puzzling in a city whose to-
tal revenue in 2009 stood at RMB 37.8 billion. 22 To make up
the revenue gap, the Kunming city government under Qiu’s
leadership set up forty-eight finance platform corporations and
provided government guarantees for them to borrow money
from various financial institutions. 23 For the subway construc-
tion, it signed credit agreements with the China Development
Bank and Bank of China. 24 Financial institutions are generally
not particularly enthusiastic about subway construction be-
cause of the long time frame involved, but the Kunming city
government’s guarantee was adequate assurance for these
lenders. As with Geng’s project in Datong, Qiu’s huge invest-
ment in infrastructure also saw land-sale revenues rise rapidly.
In 2011 alone, the city government’s land sale revenues totaled
RMB 55.8 billion. 25 Again, Qiu’s gamble might have paid off
had he remained longer in Kunming. However, he was promot-
ed to vice governor of Yunnan in November 2011, 26 and his suc-
cessor did not buy into his ideas about urban development. 27
Qiu’s legacy is numerous unfinished projects in Kunming and a
huge amount of city government debt. 28

B. “TEA BECOMES COLD AFTER HE LEAVES”: CADRE TRANSFER
POLICY AS AN OBSTACLE TO CREDIBLE COMMITMENT
    The short mayoral terms of Qiu and Geng are not excep-
tional. It is well-established practice for Chinese mayors and
party secretaries to have short tenures in any single local gov-

   21. Id.
   22. Song Jia Yan (宋佳燕), Kun Ming Fu Zhai Lu Chao 100% 3000 Yi Di
Tie Xiang Mu Xi Gan Shi Nian Cai Zheng (昆明负债超100% 3000亿地铁项目吸
干十年财政) [Debt of Kunming City Surpasses 100% the 30 Billion Metro Pro-
gram Used up Ten Years’ Fiscal Revenue], SOHU (搜狐网) (Aug. 12, 2013),
http://business.sohu.com/20130812/n383914651.shtml.
   23. Id.
   24. Id.
   25. Id.
   26. People’s Daily, supra note 20.
   27. Yin Hongwei (尹鸿伟), Zi Liao: Kun Ming Gao Bie “Qiu He Shi Dai” Fa
Zhan yu Wei Quan Shuang Xian Bing Xing (资料:昆明告别”仇和时代”发展
与维权双线并行) [Document: Kunming City Bids Farewell to the “Era of He
Qiu” Development and Rights-Protection Walk in Parallel], IFENG (凤凰网)
(Mar. 15, 2015), http://news.ifeng.com/a/20150315/43343686_0.shtml.
   28. Id.
2018]                BINDING LEVIATHAN                            1597

ernment. 29 After proving themselves for a few years, the prin-
ciple of cadre transfer requires that the CCP transfer them to
new assignments. 30 Legally, local government leaders serve
five-year terms, but in reality their rotation and promotion oc-
cur much more frequently. 31
     The cadre transfer policy is by no means a recent innova-
tion. It is in fact the contemporary manifestation of an ancient
method of insuring that local officials do not build up a local
power base capable of resisting central government com-
mands.32 The rotations imposed by the Qing Dynasty system of
bureaucratic assignments were strikingly similar to those cur-
rently imposed by the CCP. As William Rowe notes, “as every-
one knew, the throne was trading off independent initiative on
the part of its officials for the sake of central control.” 33
     Centuries later, that tradeoff remains the same. It is intui-
tively plausible that such rapid rotation results in cadres sys-
tematically undervaluing long-term investments, the ultimate
value of which is difficult to ascertain at the time of invest-
ment. If cadres expect to be promoted in three to five years,
then they may rationally opt for investments that produce
smaller but more easily measured and immediate value for
which they can take credit. Empirical research suggests that
short terms for local leaders have a number of negative conse-
quences, and economists have found that enterprises postpone
investments and banks are reluctant to loan money to local
governments during a leadership turnover period. 34

C. DEBT AS A CONSEQUENCE OF SHORT-TERM BEHAVIOR
    Geng’s and Qiu’s leaving giant municipal debts for their
successors is not atypical. The National People’s Congress
(NPC) recently reported that “incurring debt often brings per-
formance credit to the current government while the obligation
to pay is left to the next government or upper-level govern-
ment. This mismatch between the right to incur debt and the

   29. See LANDRY, supra note 3, at 263 (2008).
   30. Zheng Yong Nian (郑永年), Zhong Guo Di Fang Zheng Fu Zhi Li Wei
Ji ji Qi Ti Zhi Gen Yuan (中国地方政府治理危机及其体制根源) [China’s Local
Governance Crisis and Its Institutional Roots], LIAN HE ZAO BAO (联合早报)
(Nov. 22, 2016), http://www.zaobao.com.sg/zopinions/views/story20161122
-693309.
   31. Id.
   32. ROWE, supra note 4.
   33. Id. at 39.
   34. Lun & Man, supra note 7.
1598                MINNESOTA LAW REVIEW                          [102:1591

responsibility to pay leads to the weak consciousness of local
government debt risk.” 35 The NPC’s comprehensive 2015 report
on local-government debt revealed that, at the end of 2014, a
few local governments had already carried overdue debt for
several consecutive years. 36 Some local governments had even
incurred new debt just to pay the interest on their old debt. 37 A
2014 audit of local governments found that more than 20% of
recent loans had been used to pay older debts. 38 The interest
rates on local government debts are actually quite high, rang-
ing from 7% to 20%. 39 “In general, local governments are pay-
ing interest rates that are 4–5 percentage points above the pre-
vailing treasury yield (about 3.5% on ten-year bonds) . . . .” 40
Short-term mayors’ inability to commit to completing long-term
projects is probably a main reason for the high interest rates of
local-government debt.
     The rapid expansion of local government debt is raising
concerns over the possibility of a debt crisis in China.41 Alt-
hough scholars and policymakers have yet to reach consensus
concerning the likelihood of such an event,42 it is clear that lo-
cal-government debt is a major challenge for China’s financial

    35. Yi Xie Di Fang Zheng Fu Reng Ran Wei Gui Ju Zhai Shen Zhi Ju
Zhai Fa Fang Yang Lao Jin (一些地方政府仍然违规举债,甚至举债发放养老金)
[Some Local Governments Still Borrow Illegally, or Even Pay Pensions out of
Such Illegal Borrowings], BEIJING NEWS (新京报) (Dec. 23, 2015), http://big5
.xinhuanet.com/gate/big5/news.xinhuanet.com/politics/2015-12/23/c_
128557588.htm.
    36. The Research Office of the Budgetary Affairs Comm. for the Nat’l
People’s Cong. of the People’s Republic of China (全国人大常委会预算工作委员
会调研组), Guan Yu Gui Fan Di Fang Zheng Fu Zhai Wu Guan Li Gong Zuo
Qing Kuang de Diao Yan Bao Gao (关于规范地方政府债务管理工作情况的报告),
[The Report on the Work Progress Regarding the Regulation of Local Govern-
ment Debt Management], NAT’L PEOPLE’S CONG. (中国人大杂志) (2016), http://
www.npc.gov.cn/npc/zgrdzz/2016-03/29/content_1986294.htm.
    37. Id.
    38. Richard Dobbs, Susan Lund, Jonathan Woetzel & Mina Mutafchieva,
Debt and (Not Much) Deleveraging 76, MCKINSEY GLOBAL INST., Feb. 2015, at
76.
    39. Yi Xie Di Fang Zheng Fu Reng Ran Wei Gui Ju Zhai Shen Zhi Ju
Zhai Fa Fang Yang Lao Jin, supra note 35.
    40. Xiaowei Huang, Chen Song & Yi David Wang, Does China’s Debt-for-
Bond Swap Reduce Banks’ Risk, CHINA INT’L CONF. IN FIN. 3 (Feb. 7, 2017),
https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=
CICF2017&paper_id=329.
    41. Richard Partington, China’s Credit Rating Cut to A+ by S&P Over Ris-
ing Debt Fears, GUARDIAN (Sept. 21, 2017), https://www.theguardian.com/
business/2017/sep/21/sp-cuts-chinas-credit-rating-to-a-over-rising-debt-fears.
    42. See Huang et al., supra note 40, at 2–3.
2018]                   BINDING LEVIATHAN                                   1599

system.43 China’s rising debt and slowdown in economic growth
prompted Moody’s Investors Service to downgrade the country’s
credit rating in July 2017, cutting its long-term currency issuer
rating to A1 from Aa3. 44 The last time Moody’s cut China’s sov-
ereign rating was in 1989, when the country’s economic mo-
mentum was halted by the government’s violent reaction to the
Tiananmen Square protests.45 Two months after Moody’s
downgrade, and less than a month before the Communist Par-
ty’s Nineteenth Party Congress, Standard & Poor’s Global Rat-
ings followed suit by down-grading Chinese debt from AAA to
A+ on September 21, 2017. 46

II. DO MARKETS DISCIPLINE SHORT-TERM OFFICIALS?
     If the central government cannot monitor or discipline local
governments effectively, can markets do so? Here, we examine
whether the current housing and financial markets can effec-
tively discipline short-term officials. As explained below, Chi-
nese cities lack two mechanisms for making credible commit-
ments that American cities enjoy: home-owning residents’
electoral power and independent lenders’ financial incentives.47

A. CAPITALIZATION, HOMEVOTERS, AND CREDIBLE
COMMITMENT TO LOCAL AMENITIES
     If long-term and value-adding reforms could be reliably en-
trenched, then local officials would have powerful and immedi-
ate incentives to provide local amenities that are attractive to
homebuyers, because such amenities increase local land values
and thereby also increase the local governments’ revenues from
selling ground leases. 48 It is a familiar point that homebuyers
are willing to pay more for houses located in jurisdictions with
better schools, cleaner air, lower crime or other amenities com-

    43. See Partington, supra note 41.
    44. Shen Hong, Moody’s Cuts Its China Rating for the First Time Since
1989, WALL ST. J. (May 24, 2017), https://www.wsj.com/articles/moodys-cuts
-its-china-rating-citing-risks-from-rising-debt-1495590160.
    45. Id.
    46. Partington, supra note 41.
    47. See infra Parts II.A, II.B.
    48. For a more complete explanation of the process by which capitaliza-
tion of local amenities into housing prices can give local officials revenue-based
incentives to provide amenities that foot-voting citizens desire, see Roderick
M. Hills, Jr. & Shitong Qiao, Voice and Exit as Accountability Mechanisms:
Can Foot-Voting Be Made Safe for the Chinese Communist Party?, 48 COLUM.
HUM. RTS. L. REV. 158, 180–83 (2017).
1600                MINNESOTA LAW REVIEW                          [102:1591

pared to competing jurisdictions. 49 By “capitalizing” such im-
provements into housing prices, markets increase the revenue
of the local governments that are most successful in attracting
homebuyers. 50 To the extent that local officials are evaluated
according to their ability to raise revenue, such capitalization
gives local officials with short tenures an incentive to take the
long view. 51
     Capitalization, however, depends on local officials’ ability
to make a credible commitment to prospective homebuyers that
the reforms they value will be durable. Promises to create ex-
cellent schools, cleaner air, or an honest police force will in-
crease bids on lots only if those promises are believed.52 Ra-
tional bidders will reduce their bids on local real estate by the
amount necessary to insure themselves against the risk that
the mayor’s successors will renege on the promises (implied or
express) he or she has made.
     William Fischel’s “homevoter hypothesis” shows how liber-
al democracies can address the problem of credible commitment
through local elections that enable homebuyers to protect their
investments at the ballot box. 53 Once homebuyers invest in a
community, they become what Fischel calls homevoters—that
is, people whose undiversified investment in local real estate
gives them powerful incentives to monitor local politics. 54
Homevoters’ incentives to closely monitor politics give them
power over the local legislature, ensuring that individual legis-
lators pay close attention to the opinions of homeowners about
developments in their neighborhoods. 55 Knowing that their
purchase of real estate gives them control over the local legisla-
ture sufficient to protect their investment from future changes
in zoning or fiscal policy, American homebuyers are prepared to
pay more for such amenities as restrictive zoning and good
schools. 56

    49. See Anup Malani, Valuing Laws as Local Amenities, 121 HARV. L.
REV. 1273, 1275 (2008).
    50. See FISCHEL, supra note 8, at 39–71.
    51. Hills & Qiao, supra note 48, at 185.
    52. FISCHEL, supra note 8, at 49–51 (describing incomplete capitalization
of temporary tax relief in land values in Massachusetts).
    53. Id. at 74–97.
    54. Id. at 72–97 (describing median voter s’ control over local politics).
    55. Id. at 96–97.
    56. Roderick M. Hills, Jr. & David Schleicher, Planning an Affordable
City, 101 IOWA L. REV. 91, 112–15 (2015).
2018]                   BINDING LEVIATHAN                                 1601

     Chinese officials, by contrast, have weak electoral mecha-
nisms for locking in value-enhancing programs, a weakness
that limits homebuyers’ ability to reward local leaders who pro-
tect those programs. Although local people’s congresses at the
level of urban district and town are directly elected, the rules
for nominating candidates and norms for campaigning dampen
the power of delegates to determine policy.57 In indirect elec-
tions, where directly elected local congresses select delegates
for the level of government above them, party leaders rather
than the local congress play the leading role in setting quotas
for different social groups and choosing the delegation. 58 The
capacity for local landowners to control the congress, therefore,
is limited: party leaders might decide to emphasize entirely dif-
ferent industries based on their own policy priorities.59 Mayors
and party secretaries of cities are, in theory, selected by the lo-
cal congresses; but in reality, they are chosen by the party
leadership of the next higher level of government, further
weakening the capacity of the local congress to lock in reforms
of an outgoing mayor. 60
     Far from empowering mayors, this lack of an electoral con-
nection actually weakens them by depriving them of an im-
portant method of making credible commitments through an
electoral coalition of program beneficiaries, which would bind
their successors to respecting the incumbent’s programs. In the
absence of such a tool, Chinese mayors rationally favor infra-
structure investments. Unlike investments in such long-term
and intangible goods as administrative fairness and education-
al and environmental quality, investments in infrastructure
provide quick and easily verifiable benefits to buyers. A road,
once built, will always be there, whereas investments in schools

   57. BARRETT L. MCCORMICK, POLITICAL REFORM IN POST-MAO CHINA:
DEMOCRACY AND BUREAUCRACY IN A LENINIST STATE 130–56 (1990) (describ-
ing local elections in the wake of the 1979 election law reform and noting vari-
ous Leninist impediments to local voters’ electing candidates independent
from the local party secretary).
   58. Ying Sun, Municipal People’s Congress Elections in the PRC: A Process
of Co-Option, 23 J. CONTEMP. CHINA 183, 186–88 (2014) (describing process of
delegate quota setting and selection of delegates).
   59. Id. at 189 (quoting city party leaders who emphasized selection of
members of “four pillar industries in our city, i.e. the high and new technology
sector, the modern service industry, the finance business, and the cultural in-
dustry” as delegates).
   60. LANDRY, supra note 3, at 80–115 (describing appointment process of
mayors and party secretaries).
1602                 MINNESOTA LAW REVIEW                           [102:1591

or a polite police force may well disappear once a mayor or par-
ty secretary has moved on to greener pastures.
     That local officials across China are ignoring what home-
buyers plainly want suggests that the incentives of the two par-
ties are not well aligned. One possible reason for this misa-
lignment is that local officials are not systematically evaluated
on the basis of their comparative success in raising the aggre-
gate value of real estate within their jurisdictions. 61 Another is
that even if they were assessed on the basis of indicators keyed
to real estate values, they have no mechanism by which to lock
in reforms that promote such values over the long haul.

B. INDEPENDENT LENDERS AND CREDIBLE COMMITMENT TO
HARD BUDGET CONSTRAINTS
     Might the lenders themselves be a force for reining in local
borrowing? After all, most are themselves governmental offi-
cials running state-owned enterprises. 62 Could bankers’ incen-
tives to win promotion induce them to play the heavy with
wayward localities?
     State-owned banks, however, face the same credible com-
mitment problem as local officials: as noted below, the very
omnipotence of the CCP undermines the reliability of bankers
as CCP agents for fiscal discipline. The CEOs of state-owned
banks move up the bureaucratic ladder like other officials, and
their portfolios do not follow them to their next post. 63 Accord-
ingly, if the loans they extend to mayors to cultivate political
alliances turn out to be nonperforming, that is a problem for
their successors, not for them. 64 The leaders of some banks may

    61. Id. at 114–15 (describing pros and cons associated with appointment
process of local officials).
    62. Ing. Jan Bejkovský, State Capitalism in China: The Case of the Bank-
ing Sector, PROC. OF THE INT’L ACAD. RES. CONF. ON SMALL & MEDIUM EN-
TERPRISES, at 7 (Aug. 2–4, 2016), http://globalbizresearch.org/IAR16_Vietnam_
Conference_2016_Aug/docs/doc/PDF/VS611.pdf (cataloguing different types of
banks in China and concluding that “the vast majority of assets in China’s
banking sector is under state control”).
    63. For a survey of the rules governing the appointment and promotion of
executives at state-owned banks, see Li-Wen Lin, Reforming China’s State-
Owned Enterprises: From Structure to People, 229 CHINA Q. 107 (2017). For
the Chinese Communist Party rules on promotion of executives, see
Dangzheng Lingdao Ganbu Xuanba Renyong Gongzuo Tiaoli (党政领导干部选
拔任用工作条例) [Rules on the Selection and Appointment of Party and Gov-
ernment Leaders] (Jan. 16, 2014), http://renshi.people.com.cn/n/2014/0116/
c139617-24132485.html.
    64. We discuss the career incentives of Chinese officials infra in Part
III.C. See also Hills & Qiao, supra note 48, at 178–79 (discussing how officials
2018]                  BINDING LEVIATHAN                                1603

enjoy the political clout to force a mayor to make a settle-
ment. 65 For example, evidence suggests that local officials pay
off loans from the politically weighty China Development Bank
more quickly than those issued by commercial banks.66 Howev-
er, even the most powerful bank bosses lack strong incentives
to limit loans to creditworthy municipalities, particularly as lo-
cal government balance sheets are hardly models of transpar-
ency. 67 The actual track record of municipalities in racking up
extraordinary levels of debt to build ghost cities and zombie
firms provides an anecdotal illustration of bank-imposed disci-
pline being less than ideal. 68 The recent wave of bank swaps of
local government financing vehicle (LGFV) debt for municipal
bonds suggests that bankers are relying on the central govern-
ment’s implicit guarantee of those bonds to improve bank port-
folios. 69

           III. EVALUATING CURRENT SOLUTIONS
    In the face of its emerging debt crisis, China’s national
government has taken multiple measures to avoid it, including
swapping mature debt for bonds to avoid debt default, signaling

behave when they are evaluated on the basis of their jurisdiction’s GDP and
revenue).
    65. On the general tendency of state-owned banks to extend loans for rea-
sons other than the borrower ’s credit-worthiness, see Paolo Sapienza, The Ef-
fects of Government Ownership on Bank Lending, 72 J. FIN. ECON. 357 (2004)
(concluding from empirical analysis that “state-owned banks are a mechanism
for supplying political patronage”). These general incentives of executives at
state-owned banks seem to operate in China. See Minxin Pei, How Rotten Poli-
tics Feeds a Bad Loan Crunch in China, FIN. TIMES (May 7, 2006), http://
carnegieendowment.org/2006/05/07/how-rotten-politics-feeds-bad-loan-crunch
-in-china-pub-18308 (summarizing survey evidence that bank executives at
state-owned banks are not disciplined for their banks’ nonperforming loans).
    66. See Haoyu Gao, Hong Ru, & Dragon Yongjun Tang, Subnational Debt
of China: The Politics-Finance Nexus, (2016), https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=2783125.
    67. See Counting Ghosts: China Opens the Books of Its Big-Spending Lo-
cal Governments, ECONOMIST (Jan. 4, 2014), http://www.economist.com/news/
china/21592628-china-opens-books-its-big-spending-local-governments
-counting-ghosts (discussing challenges auditing local government debt).
    68. For some of the numerous stories about Chinese cities’ investments in
apparently non-productive physical infrastructure, see Frank Langfitt, Chi-
na’s White Elephants: Ghost Cities, Lonely Airports, Desolate Factories, NPR
(Oct. 15, 2015), http://www.npr.org/sections/parallels/2015/10/15/446297838/
chinas-white-elephants-ghost-cities-lonely-airports-desolate-factories.
    69. See Shirley Yam, Chinese Banks Swap Transparency for Debt, S. CHI-
NA MORNING POST (Apr. 22, 2016), http://www.scmp.com/business/banking
-finance/article/1937649/chinese-banks-swap-transparency-debt.
1604              MINNESOTA LAW REVIEW                       [102:1591

a no-bailout principle, threatening to impose lifetime responsi-
bilities on local officials, and using local people’s congresses to
supervise local governments’ borrowing and spending behav-
iors. After detailed examination we argue that the debt-bond
swaps worsen the moral hazard of short-term behaviors, that
the no-bailout principle does not really exist due to the system-
ic risk posed by local governments, and we point out the chal-
lenges to imposing lifetime responsibilities and empowering lo-
cal people’s congresses.

A. DEBT-BOND SWAPS?
     High rates of local-government debt mean that debts are
compounding at an alarming rate. To ease the repayment pres-
sure on local governments and reduce the risk of default, the
national government introduced a bond-for-debt swap program
for local-government debt in March 2015.70 After the initial
RMB 1 trillion target set in March had been reached, a second
swap in the same amount was launched in June of the same
year. 71 The program was then further expanded to reach RMB
3.2 trillion in August, and is slated to total RMB 15 trillion by
2018.72 The goal of the debt-for-bond swap program is to lower
debt-servicing costs and extend maturities by converting short-
term, high-interest bank loans into low-interest, long-term mu-
nicipal bonds.73
     The debt-bond swap, however, is impeded by the same
problems of credible commitment plaguing municipal govern-
ments. Put simply, leaders of state-owned banks, like leaders of
cities, have institutional incentives to favor short-term benefits
over long-term health of their banks’ balance sheets. 74 The in-
terest rate for local government debt stands above 7%, whereas
the swap program extends that debt into the future with inter-
est rates under 4%. 75 Because the leaders of state-owned banks
are evaluated by their banks’ profits and balance sheets, the

   70. See Gabriel Wildau, China Imposes $160bn Municipal-Bonds-for-Debt
Swap, CNBC (May 13, 2015), https://www.cnbc.com/2015/05/13/china-imposes
-160bn-municipal-bonds-for-debt-swap.html.
   71. China Expands Debt-for-Bond Swap Plan to 3.2 Trillion Yuan:
Xinhua, CNBC (Aug. 27, 2015), https://www.cnbc.com/2015/08/27/china
-expands-debt-for-bond-swap-plan-to-32-trillion-yuan-xinhua.html.
   72. Id.; see also Huang et al., supra note 40, at 3.
   73. See supra note 71.
   74. See JAMES STENT, CHINA’S BANKING TRANSFORMATION: THE UNTOLD
STORY (2017).
   75. Huang et al., supra note 40, at 3.
2018]                  BINDING LEVIATHAN                               1605

potential loss of interest would impose an immediate loss dur-
ing the current leaders’ tenure. 76 As the swap program priori-
tizes debts that have already matured or will mature in the
current fiscal year, some banks have voluntarily extended the
repayment deadline to keep interest rates high rather than
swapping local-government debts for bonds. 77 In one case, a
state-owned bank offered a LGFV a high-interest loan to pay
off matured debt, encouraging the LGFV to avoid the swap to
protect future cooperation with the bank. 78 In short, the leaders
of state-owned banks pass off bad municipal debt to their suc-
cessors—just like local government leaders.79
     Credible commitment issues impede the debt-bond swap in
a second sense. Precisely because the risk of excessive munici-
pal debt is systemic in nature, state-owned bank leaders do not
believe the national government will allow it to happen. 80 Hop-
ing for an eventual bailout of excessively indebted local gov-
ernments, creditors blithely accept municipal debt to avoid the
immediate costs of lower interest rates. 81 This mindset has re-
sulted in two publicly reported cases in which swap plans were
canceled under investor pressure.82 As one NPC report points
out: “According to our investigation, because most swapped
debt will not be repaid in five years, some local governments
has no immediate pressure anymore and want to swap all their
existing debt. They even think that local debt is not a problem
anymore.” 83

   76. See STENT, supra note 74.
   77. Zhong Yuan (钟源), Zhao Jing (赵婧), Zhi Huan Zhai Gui Mo Pan
Sheng Yin Hang He Di Fang Zheng Fu Bo Yi Jiang Sheng Ji (置换债规模攀升
银行和地方政府博弈将升级) [As the Scale of Swept Debts Increases, the Game
Between Banks and Local Governments Will Escalate], PEOPLE.CN (人民网)
(Feb. 2, 2016), http://money.people.com.cn/n1/2016/0202/c42877-28102860
.html.
   78. Id.
   79. Id.
   80. See Peter S. Jeffrey, The Chinese Municipal Debt Crisis and Central
Government Response (Dec. 17, 2015) (unpublished thesis, University of
Pennsylvania) (on file with Penn Libraries Social Impact Research Experience,
University of Pennsylvania) (noting that current levels of local government
debt are unsustainable, and the national government may need to bailout the
local governments to maintain current levels of development).
   81. Id.
   82. Cheng Tou Zhai Fa Zhan Li Shi Zhuan Ti Yan Jiu (城投债发展历史专
题研究) [Research on the Development History of Urban Investment
Bonds], JRJ (金融界) (Jun. 9, 2017), http://bond.jrj.com.cn/2017/06/
09081922590656.shtml.
   83. Committee of Budget Affairs of the National People’s Congress Stand-
1606                 MINNESOTA LAW REVIEW                           [102:1591

    To conclude, the debt-bond swaps imposed by the central
government are not particularly welcome by investors who rely
on the central government’s implicit guarantee of local debt,
and more importantly, they worsen the moral hazard of short-
term local government officials rather than solving it.

B. NO-BAILOUT PRINCIPLE?
     In theory, because the Party controls the tenure of local of-
ficials,84 the CCP’s omnipotent leadership could forbid local of-
ficials from incurring too much debt. Indeed, as a matter of le-
gal theory, local governments lack the power to incur bonded
indebtedness. 85 As early as 2014, the national government in-
stituted the principle of no bailouts in dealing with local gov-
ernment debt. 86
     This theoretical power to curb debt, however, is weakened
by the absence of a mechanism through which the central gov-
ernment can make credible commitments to enforce hard budg-
et constraints against local officials. Chinese cities (like Ameri-
can cities 87) can evade formal legal limits on city debt through
the establishment of LGFVs—separate corporations that are

ing Committee (全国人民代表大会常务委员会预算工作委员会), Quan Guo Ren
Da Di Fang Zhai Diao Yan Bao Gao Shi Da Wen Ti Qiao Xiang Zhai Wu Jing
Zhong (全国人大地方债调研报告 十大问题敲响债务警钟) [National People’s
Congress Local Debt Research Report’s Top Ten Questions Raise the Debt
Alarm], SINA (新浪网) (Dec. 26, 2015), http://finance.sina.com.cn/money/bond/
market/2015-12-26/doc-ifxmxxsp7010714.shtml.
    84. See generally LANDRY, supra note 3 (exploring how the CCP manages
local officials in order to meet its goals).
    85. Zhong Hua Ren Min Gong He Guo Yu Suan Fa (中华人民共和国预算法)
[Budget Law of the People’s Republic of China] (promulgated by Order No. 21
of the President of the People’s Republic of China on Mar. 22, 1994, effective
Jan. 1, 1995), art. 28, translated in 1994 P.R.C. Laws; Huang et al., supra note
40, at 6–7. For an exploration of the ambiguities in these limits on the power
to incur debt, see Donald Clarke & Fang Lu, The Law of China’s Local Gov-
ernment Debt Crisis: Local Government Financing Vehicles and Their Bonds
7–15 (George Wash. Univ. Law Sch. Pub. Law Research, Paper No. 2016-31,
2016), http://ssrn.com/abstract=2821331 (describing legally ambiguous re-
strictions on local governments’ issuing debt and creation of LGFVs to circum-
vent these restrictions).
    86. The State Council of the People’s Republic of China, Guo Wu Yuan
Guan Yu Jia Qiang Di Fang Zheng Fu Xing Zhai Wu Guan Li de Yi Jian (国务
院关于加强地方政府性债务管理的意见) [The State Council’s Opinions on
Strengthening the Management of Local Government Debt], GOV.CN (中华人民
共和国中央人民政府网站) (Sept. 21, 2014), http://www.gov.cn/zhengce/content/
2014-10/02/content_9111.htm.
    87. LYNN A. BAKER & CLAYTON P. GILLETTE, LOCAL GOVERNMENT LAW
618 (4th ed. 2010) (describing techniques for avoiding debt limits including the
creation of special authorities with separate debt-issuing capacity).
2018]                  BINDING LEVIATHAN                               1607

not formally part of the local government itself—which then
borrow money secured by real estate turned over to them. 88
     In theory, the central government could force lenders who
make risky loans to LGFVs to internalize the risk by commit-
ting to not bailing out lenders or LGFVs that get in over their
heads. In practice, however, lenders might not regard such a
commitment as credible.
     The central government’s actual “no-bailout principle”
turned out to be precisely such a weak and noncredible con-
straint. On investigation, it actually allowed bailouts.89 Lower-
level governments can still apply for financial assistance from
upper-level governments in the event of a debt crisis. 90 In the
highest-level crises, such as a situation in which a provincial-
level government defaults on its debt or more than fifteen per-
cent of the cities in a province default on their debt, the provin-
cial-level government is obligated to report to the Ministry of
Finance, and the State Council can decide to transfer money to
that government to make debt payments and to set up a work-
ing group to supervise and coordinate all crisis-related work. 91
     In short, local governments are simply too big to fail. If a
provincial government or the national government decided not
to take any measure to contain the crisis and spread of panic,
the likely result would be systemic financial crisis. 92 The na-
tional government simply cannot afford to take such a risk,
which is why the aforementioned debt plan incorporates finan-
cial assistance measures despite the declaration of “no
bailouts.” 93 National or provincial financial assistance comes

   88. See Clarke & Lu, supra note 85, at 13–29 (providing a detailed over-
view of LGFVs’ operation, liabilities, and monitoring by central government).
   89. Wang Chang Yong (王常勇), Guo Wu Yuan Ding Gui Di Fang Zhai:
Zhong Yang Tui Bu Jiu Zhu Yuan Ze (国务院定规地方债:中央推不救助原则)
[The State Council Rules on Local Debt: The Central Government Introduces
the Principle of Non-assistance], CAIXIN (财新网) (Oct. 2, 2014), http://economy
.caixin.com/2014-10-02/100735206.html.
    90. Id.
    91. Guo Wu Yuan Ban Gong Ting Guan Yu Yin Fa Di Fang Zheng Fu
Xing Zhai Wu Feng Xian Ying Ji Chu Zhi Yu An de Tong Zhi (国务院办公厅关
于印发地方政府性债务风险应急处置预案的通知) [Notice of the General Office of
the State Council on Issuing the Emergency Response Plan for Local Govern-
ment Debt Risks], MINISTRY OF FIN. OF THE PEOPLE’S REPUBLIC OF CHINA
(Oct. 27, 2016), http://www.mof.gov.cn/zhengwuxinxi/zhengcefabu/201611/
t20161114_2457914.htm [hereinafter Ministry of Finance Notice].
   92. Wang, supra note 89.
    93. For the challenges of imposing a hard budget constraint ex ante on
local officials in China, see Jing Jin & Heng-fu Zou, Soft-Budget Constraints
and Local Government in China, in FISCAL DECENTRALIZATION AND THE
1608                MINNESOTA LAW REVIEW                          [102:1591

with a catch: that is, the disciplining and punishment of local
government leaders, who are thereafter disqualified from pro-
motion. 94 The distant prospect of being punished for a later lo-
cal bankruptcy, however, is apparently an insufficient incentive
for an official to avoid current debt, 95 perhaps because that offi-
cial likely will not hold office in the bankrupt jurisdiction at the
moment of systemic crisis.

C. LIFETIME RESPONSIBILITY?
     How then can we change local officials’ incentives? Like
politicians everywhere, Chinese officials care about their ca-
reers.96 In China, an authoritarian regime without democratic
elections, the national government has implemented a cadre
evaluation system based on GDP growth.97 The cadre evalua-
tion system, however, presents a dilemma: as criteria become
more complex, local officials’ misreporting can defeat the cen-
tral government’s capacity to monitor whether the criteria have
been satisfied. 98 The central government’s evaluation of local
debt poses precisely this dilemma of balancing accuracy of in-

CHALLENGE OF HARD BUDGET CONSTRAINTS 289 (Jonathan Rodden, Gunnar
S. Eskeland & Jennie Litvack eds., 2003).
   94. See Ministry of Finance Notice, supra note 91 (detailing the proce-
dures available for holding local government officials accountable for manag-
ing provincial debt).
    95. According to multiple sources, debt is growing rather than shrinking.
See, e.g., Wu Hong Yu Ran (吴红毓然), Jin Rong Gong Zuo Hui Yi Ding Diao
Di Fang Zhai Shou Ti Zhong Shen Wen Ze Zhi (金融工作会议定调地方债 首提
终身问责制) [The Financial Work Conference Sets Tone for Local Government
Debts: First Time Mentioning Lifelong Accountability Institutions], CAIXIN (财
新网) (July 16, 2017), http://finance.caixin.com/2017-07-16/101116483.html. It
now amounts to RMB 35 trillion, far exceeding the RMB 16 trillion debt limit
approved by the NPC Standing Committee. Dong Jing (董兢), Zhong Cai Ban
Fu Zhu Ren: Xia Ban Nian Jiang Xian Zhi Di Fang Zhai Feng Xian (中财办副
主任:下半年将限制地方债风险) [Deputy Director of China Financial Affairs
Office: Will Limit the Risk of Local Debt in the Second Half of the Year],
CAIXIN (财新网) (July 27, 2017), http://finance.caixin.com/2017-07-27/
101122968.html.
    96. Hills & Qiao, supra note 48, at 177–79 (discussing the use of promo-
tion as a feedback mechanism encouraging government officials to take certain
actions).
    97. Zong Wen (宗文), Gan Bu Bu Zuo Wei Ye Shi Yi Zhong Fu Bai (干部不
作为也是一种腐败) [Cadre Inaction Is Also a Kind of Corruption], PEOPLE.CN
(人民网) (Feb. 2, 2010), http://fanfu.people.com.cn/GB/10913536.html.
    98. See Hills & Qiao, supra note 48, at 168–71. For evidence of such local
circumvention of the one-child policy through local misreporting of data, see
JUAN CARLOS SUÁREZ SERRATO, XIAO YU WANG, & SHUANG ZHANG, THE ONE
CHILD POLICY AND PROMOTION OF MAYORS IN CHINA (Feb. 3, 2016), https://
www.gsb.stanford.edu/sites/gsb/files/pe_04_16_wang.pdf.
2018]                  BINDING LEVIATHAN                               1609

formation about true debt capacity with simplicity of measures
sufficient to allow monitoring of that information.
     In the face of a burgeoning debt risk, the national govern-
ment decided as early as December 2013 to incorporate debt
risk into the cadre evaluation system.99 Recently Chinese Pres-
ident Xi Jinping proposed lifetime responsibility as a way of
constraining local officials’ short-term behavior. 100 President
Xi’s proposal mentioned lifetime responsibility and looking into
responsibilities retrospectively. Lifetime responsibility differs
from the no-bailout principle in terms of the underlying as-
sumption about the relationship between the national govern-
ment and local governments. In proposing the concept of life-
time responsibility, the national government is demonstrating
that it is taking responsibility for disciplining local officials,
which is consistent with China’s centralized regime.101 The
proposal sends a clear signal to local officials that the national
government is very serious about combating local government
debt, and may well exert a major impact on their decisions. 102
     The challenge lies, however, in implementing the proposal.
Top-down evaluation systems pose a dilemma: central officials
can evaluate local officials with simple criteria that are easy to
verify but that ignore relevant aspects of local officials’ perfor-
mance, or they can use a comprehensive evaluation system re-
quiring information too difficult to collect and verify. 103 As-
sessing the optimal level of local debt poses precisely this
dilemma: despite worries about excessive debt, the central gov-
ernment still seeks to encourage a certain degree of economic
development. 104 It is difficult for the central government to tell
where the ideal balance lies, and it is also difficult to establish
whether a default on debt is the fault of an initial blame-
worthy decision to incur debt or later mismanagement of the

    99. Di Yi Cai Jing (第一财经), Di Fang Zhai Feng Xian Fang Kong Sheng
Ji: Wen Ze Shou Ti “Zhong Shen, Dao Cha” (地方债风险防控升级:问责首提”终
身、倒查”) [The Upgrade of Local Debt Risk Prevention and Control: The First
Mention of “Lifelong Responsibility” and “Reversed Investigation”], CHINA.COM
(中国网) (July 16, 2017), http://finance.china.com/news/11173316/20170716/
30973768.html.
  100. Id.; Sidney Leng, Hold Local Governments Accountable for Their Debt,
Chinese President Says, S. CHINA MORNING POST (July 18, 2017), http://www
.scmp.com/news/china/economy/article/2103008/hold-local-governments
-accountable-their-debt-chinese-president.
  101. See Di Yi, supra note 99.
  102. See id.
  103. See supra note 98 and accompanying text.
  104. Zong, supra note 97.
1610                MINNESOTA LAW REVIEW                         [102:1591

debt-created asset. 105 Without a simple metric balancing these
rival values accurately, any lifetime-responsibility system will
fail at selecting the right officials to reward and punish. 106

D. LOCAL PEOPLE’S CONGRESSES?
      Local legislatures are supposed to control the power of the
purse, that is, local-government spending. Local governments
are in charge of drafting their own budgets, which they then
send to their Local People’s Congress (LPC) for review and ap-
proval. 107 The review and approval process constitutes a short
session during the annual meeting held by the local congress-
es. 108
      In theory, the LPCs could have good incentives to curb ex-
cessive debt. Although LPCs differ from city councils in demo-
cratic countries, they constitute a collection of local elites, in-
cluding intellectual, economic, and political elites. 109
Government officials who are nearing retirement age and have
no prospects of promotion often become members of the stand-
ing committees of LPCs. 110 These local elites have both the mo-
tivation and expertise to contain the short-term behavior of lo-
cal administrative leaders. First, although they were not
democratically elected, most are from the local area and have a
long-term interest in sound local governance.111 They may be
local college professors, investors, or, as noted, former senior

  105. Hills & Qiao, supra note 48, at 166–71 (discussing the challenges of
supervising local government officials).
  106. Id.
  107. See, e.g., Yang Huayun (杨华云) & Bao Zhen (鲍征), Ren Da Dai Biao
Jian Yi She Yu Suan Xiu Zheng An Yi Cheng She Li Biao Jue Ji Zhi (人大代表
建议设预算修正案议程 设立表决机制) [People’s Congress Deputy Proposed
Budget Amendment Agenda and To Set up a Voting System], QQ.COM (腾讯网)
(Mar. 13, 2011), https://news.qq.com/a/20110313/000144.htm.
  108. Id.
  109. Zhao Xiao Li (赵晓力), Lun Quan Guo Ren Da Dai Biao de “Jing Ying”
Gou Cheng yu Zhi Ben zhi Ce (论全国人大代表的”精英”构成与治本之策) [On the
“Elite” Constitution of National People’s Congress Deputies and Its Fundamen-
tal Solutions], ZHONG WAI FA XUE (中外法学) (Sept. 20, 2016), http://www
.cwzg.cn/theory/201609/31102.html.
  110. Tian Bi Yao (田必耀), Jie Du Ren Da Dai Biao yu Tong Ji Ren Da
Chang Wei Hui de Si Ge Fa Lu Guan Xi (解读人大代表与同级人大常委会的四个
法律关系) [To Interpret the Four Legal Relations Between People’s Congress
Deputies and the Standing Committee of People’s Congress at the Respective
Level], PEOPLE.CN (人民网) (Feb. 17, 2004), http://www.people.com.cn/GB/
14576/14841/2343959.html.
  111. See Zhao, supra note 109.
2018]                   BINDING LEVIATHAN                                 1611

government employees.112 They do not move as often as ambi-
tious mayors and thus have no motivation or appetite for capi-
tal projects that would burnish the mayor’s reputation at the
expense of plunging the city into a debt crisis. 113 Second, local
elites have the local knowledge and expertise needed to super-
vise local governments. 114 For example, standing committee
members who previously worked for a long time in various gov-
ernment agencies understand how government works and pos-
sess the inside knowledge needed to supervise local government
finances. 115 What LPCs lack, however, is power.116
     In particular, land-sale revenues and the debts incurred by
LGFVs are excluded even from this limited review process. 117
In other words, a large portion of local-government debt lies
outside the review remit of LPCs. 118 Accordingly, local govern-

  112. See id.
  113. See id.
  114. See id.
  115. See id.
  116. People’s congresses at the national and local levels used to be called
rubber stamps. See The National People’s Congress: What Makes a Rubber
Stamp?, ECONOMIST (Mar. 5, 2012), https://www.economist.com/blogs/
analects/2012/03/national-peoples-congress; see also Lucy Hornby, Inside Chi-
na’s National People’s Congress, FIN. TIMES (Mar. 3, 2016), https://www.ft.com/
content/c4eddaf6-e108-11e5-9217-6ae3733a2cd1?mhq5j=e7; Zhu Jian Zhang
(朱建璋), Ren Da Cai Zheng Yu Suan Jian Du de Nan Dian ji Kun Jing (人大财
政预算监督的难点及困境) [Obstacles and Difficulties in the Supervision of the
Fiscal Budget of the People’s Congress], PEOPLE.CN (人民网) (May 24, 2006),
http://theory.people.com.cn/GB/40537/4398096.html. However there is evi-
dence that they have become more active in national and local politics. See
Tomoki Kamo & Hiroki Takeuchi, Representation and Local People’s Congress-
es in China: A Case Study of the Yangzhou Municipal People’s Congress, 18 J.
CHINESE POL. SCI. 41, 42 (2013); Rory Truex, Representation Within Bounds
(2014) (unpublished Ph.D. dissertation, Yale University), http://www.rorytruex
.com/s/rtruex-Writing-Sample-Dissertation-Chapters-1-4-7.pdf (analyzing orig-
inal data showing that local and national representatives are increasingly be-
ing held accountable by those they represent). Despite this increased activity,
people’s congresses’ power in controlling the government’s budget is still quite
weak. See generally SHUJIAN ZHANG, BUDGETARY SUPERVISION IN CHINA: AN
INSTITUTIONAL PERSPECTIVE OF PROVINCIAL PEOPLE’S CONGRESS (2015)
(providing analysis on LPCs and budgetary supervision).
  117. Wang Wei Guo (王卫国) & Liu Jia (刘佳), Zhuan Jia Jian Yi Pei Zhi
Zhuan Ren Shi Xian Ren Da Dui Zheng Fu Yu Suan Jue Suan Jing Chang
Xing Jian Du (专家建议配置专人实现人大对政府预算决算经常性监督) [Experts
Suggest Allocations of Specially-Assigned Person To Account for Regular Su-
pervisions on Government Budgets], IFENG (凤凰网) (Nov. 13, 2012), http://
news.ifeng.com/mainland/special/zhonggong18da/content-2/detail_2012_11/
13/19091066_0.shtml.
  118. Id.
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